UK PLC’s hunger for M&A is outstripping the US and Europe, but data suggests that the capacity to fund deals could be about to wane, according to the latest edition of KPMG’s Global M&A Predictor.
Between June 2015 and June 2016, forward P/E ratios - our measure of corporate appetite or confidence - of the UK’s largest corporates are forecast to increase by 13 percent, compared to 8 percent in Europe and 6 percent in the US.
However, net debt to EDITDA - our measure of capacity - is predicted to fall by 7 percent over the same period.
Nonetheless, Andrew Nicholson, Head of M&A in the UK for KPMG, believes that the outlook remains bright for UK M&A. He said: “With the debt markets more accessible than they have been for some time, our view is that the capacity for deals by UK corporates is showing little sign of diminishing. Couple this increasing buoyancy with a more stable economy and a greater convergence between vendor and purchaser price expectations, and all the signs are there that UK deal volumes will increase steadily over the coming months.”
A potential fly in the ointment is that increasing confidence still does not appear to be reflected in actual transaction levels, with both completed deal volumes and values falling in the UK and globally over the six-month period from January to June 2015.
“Globally, it feels like there has been a slight slowdown in the market,” added Andrew Nicholson. “The continuing impact of low oil prices and political instability in some regions should not be overlooked and, of course, one wonders whether this will be exacerbated by the recent volatility seen in the capital markets. However we continue to have strong expectations for deal activity in the coming months and there are real pockets of strength to be found.”
The ongoing challenges faced by the global energy sector are clearly in evidence in the 19 percent fall in market capitalizations of the largest energy companies between June 2014 and June 2015. Profits are also down considerably over the same 12-month period.
Conversely, the defensive healthcare sector looks more stable, with an 18 percent increase in market capitalizations and a 7 percent rise in appetite for M&A. Telecommunications is also looking strong, with an 8 percent increase in appetite.
“With oil prices continuing to experience new multi-year lows, we can expect many of the acquisition plans of companies in the energy sector to be delayed or reconsidered, but it will also lead to opportunistic buys. In the broader market, for those corporates with the capacity to transact, this year will present opportunities to uncover some great value in the market,” comments Andy Cox, head of Energy M&A at KPMG in the UK.
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Notes to Editors:
About the Global M&A Predictor
KPMG’s Global M&A Predictor, is a forward-looking tool that helps member firm clients to forecast worldwide trends in mergers and acquisitions. The Predictor looks at the appetite and capacity for M&A deals by tracking and projecting important indicators 12 months forward. The rise or fall of forward P/E (price/earnings) ratios offers a good guide to the overall market confidence, while net debt to EBITDA (earnings before tax, depreciation and amortization) ratios help gauge the capacity of companies to fund future acquisitions. The Predictor covers the world by sector and region. It is produced bi-annually, using data comprised from 1,000 of the largest companies in the world by market capitalization. The financial services and property sectors are excluded from our analysis, as net debt/EBITDA ratios are not considered relevant in these industries. All the raw data within the Predictor is sourced from S&P Capital IQ. Where possible, earnings and EBITDA data is on a pre-exceptionals basis with the exception of Japan, for which GAAP has been used.
Katy Broomhead, KPMG Press Office
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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.